Semiconductors, also commonly known as semis, computer chips, microchips or chips, are an essential component in almost all modern electronic devices.
They can be found in everyday consumer products, including smartphones, laptops, televisions, and washing machines. They also have applications in many other areas, such as information technology, artificial intelligence, communications infrastructure, medical equipment, transportation networks and military systems. In fact, it’s no exaggeration to say that semiconductors are integral to the entire global economy.
According to the Semiconductor Industry Association, a record 1.15trn chips were shipped in 2021, and sales topped half a trillion dollars for the first time. Semiconductor production and demand for chips are expected to continue rising strongly in the coming years.
This could make UK semiconductor stocks an attractive proposition. But what are the best chip companies to invest in and is this market sector right for you?
What are semiconductor stocks?
Semiconductor stocks are companies that design and manufacture computer chips, whose shares can be bought and sold on a public stock market.
The industry is sometimes divided into two sub-sectors:
- Semiconductor Equipment & Materials
Companies in the former category are producers of semiconductor chips. Companies in the latter category supply tools, parts, and equipment to the semiconductor industry.
Top semiconductor stocks in the UK
Here are the leading UK semiconductor shares traded on the London Stock Exchange:
|Oxford Instruments (LSE:OXIG)||Provides systems and tools with a key focus on the semiconductor and communications markets|
|Alphawave IP Group (LSE:AWE)||Licenses semiconductor intellectual property focused on high-speed connectivity|
|IQE (LSE:IQE)||Provides compound wafer products to the semiconductor industry|
|Nanoco (LSE:NANO)||Provides quantum dots and other nanomaterials to the semiconductor industry|
|CML Microsystems (LSE:CML)||Provides a range of semiconductor devices for applications in the communications market|
Oxford Instruments is a long established and profitable technology company. It is also the largest UK semiconductor stock. It serves a range of markets, but its semiconductor & communications division has become “a key focus” in recent years.
Not so long ago, it contributed a mid-teens percentage to group revenue. It now contributes nearly 30% and is the group’s biggest division.
Management has signalled its confidence in further growth in demand by building a new state-of-the-art facility in Bristol to house its compound semiconductor systems business. Capabilities include faultfinding and failure analysis within advanced micro devices for the leading semiconductor manufacturers, and cleanliness control in precision manufacturing.
Founded in Canada in 2017 by a team with a proven track record of licensing semiconductor intellectual property (IP), Alphawave’s focus is on the hardest-to-solve connectivity challenges. It provides designs for microchips that enable data to travel faster, more reliably, and with higher performance at lower power.
The company generates revenue from licensing its IP and will also receive royalties in due course. It’s grown fast in its short life and is already profitable. As of June 2022, it counted six of the top 10 global semiconductor companies among its customers.
IQE describes itself as “the leading global supplier of advanced compound semiconductor wafers”. These wafers have a diverse range of applications across handset devices, telecoms infrastructure, and 3D sensing.
However, despite revenues well north of £100m over the last five years, the company has thus far been loss-making in bad years and struggled to make much of a profit in good years. The board recently took a decision to file a lawsuit against Israeli firm Tower Semiconductor, alleging it misappropriated IQE’s trade secrets to unlawfully obtain patents on IQE’s technology.
Nanoco is another UK semiconductor company that’s currently loss-making — and not forecast to make a profit for the foreseeable future. This despite its self-proclaimed status as “a world leader in the development, manufacture and supply of quantum dots and other semiconductor nanomaterials”.
Nanoco is also another stock in the sector currently embroiled in litigation. The board has said it’s very confident in the strength of its case against Samsung Electronics, and in “an outcome that is transformational for Nanoco’s prospects and shareholder value”.
CML Microsystems occupies a profitable niche in the development of mixed-signal, radio frequency, and microwave semiconductors for global communications markets. It targets sub-segments with strong growth profiles and high barriers to entry.
CML believes its diverse, blue-chip customer base and broad product range largely protect it from the cyclicality usually associated with the semiconductor industry.
Investing in foreign semiconductor markets
UK semiconductor stocks are relatively small when viewed on the world stage. Investors seeking industry giants will have to look to overseas stock markets.
Leviathan Taiwan Semiconductor Manufacturing Co and Dutch colossus ASML can both be traded in the US market. And of course, the US has homegrown powerhouses. The following four US chip companies all have market capitalisations in excess of $150bn:
- Nvidia Corporation
- Broadcom Inc
- Intel Corporation
- Qualcomm Inc
A further option for UK investors is to buy shares of London-listed exchange-traded fund VanEck Semiconductor ETF. The fund holds 25 of the world’s top chip stocks (including the six just mentioned), and is a one-stop-shop for broad exposure to the industry.
Are semiconductor stocks right for you?
Investors considering buying a semiconductor stock need to take a number of things into account. First, it’s important to be aware that the industry is highly cyclical. It’s notorious for periodic supply-and-demand imbalances, leading to spells of feast and famine. Investors need to be prepared to accept some large swings in the share prices of semiconductor stocks.
Another thing to be aware of is that the industry is very much driven by a maxim of ‘smaller, faster, cheaper’. There’s constant pressure on chip companies to come up with ever more advanced technology at lower prices. It can be as short as a few months before one state-of-the-art product is overtaken by another.
To successfully compete for market share, semiconductor companies need to sustain a breakneck pace of innovation. As such, it’s necessary to recycle a high percentage of revenue back into research and development (R&D).
The best chip companies to invest in
While global semiconductor sales growth is a given, translating it into profitable growth is less certain. Therefore, picking the best chip companies to invest in can be tricky.
High gross margins, operating margins, and free cash flow generation, relative to sector peers, can indicate a company that’s operationally efficient and adept at identifying good areas to target R&D. These qualities, together with a strong balance sheet, may better equip a firm to navigate the hazards of the semiconductor cycle.
If you’re prepared to accept some large ups and downs in share prices, and to put a bit of work into finding the stronger businesses in the industry, tapping into the structural growth of this market sector may be right for you.